USD/JPY Fundamental Daily Forecast – BOJ Summary Says Withdrawal of Stimulus Still Far Off

The Dollar/Yen is trading slightly higher in limited action early Monday. Last week, the dollar weakened against the yen as U.S. Treasury yields declined as investors reduced expectations for a Federal Reserve interest rate hike before the end of the year.

At 0543 GMT, the USD/JPY is trading slightly higher at 111.311, up 0.057 or +0.05%.

The USD/JPY rallied early last week, supported by hawkish talk from the Fed following its interest rate hike a couple of weeks ago. Traders were also pricing in a possible rate hike in September.

However, the odds of another rate hike dropped mid-week on the heels of weaker than expected economic news. A steep break in crude oil also raised issues about the Fed’s ability to raise rates because of weaker-than-expected inflation.

Forecast

The main issue with the USD/JPY at this time is that the dollar has lost all of its momentum since the Fed rate hike. This will be fixed by better-than-expected economic data or another boost from Fed Chair Janet Yellen later this week.

The best indicator of the direction of the Dollar/Yen this week will be the movement in the U.S. Treasury yields. This is because the Japanese Yen is very sensitive to the Japanese Government Bonds/U.S. Treasury Bonds interest rate differential at this time.

Earlier today, the Bank of Japan released its Summary of Opinions. It stated that BoJ policymakers focused on how best to communicate their intentions as improvements in the economy heighten market attention to the timing of an exit from ultra-easy monetary policy.

The summary also said that while board members stressed the need to discourage markets from speculating that a withdrawal of stimulus was near, they also showed little appetite for additional easing despite subdued inflation.

“The price stability target cannot be achieved easily within a short-time frame. It is crucial to maintain accommodative financial conditions and keep the economy expanding as long as possible,” one board member was quoted as saying.

What this essentially means is that the BOJ will not be in a position to start tightening for a long time.

The key reports on Monday are Core Durable Goods Orders and Durable Goods Orders. Treasury yields are likely to respond to these reports which will influence the movement in the U.S. Dollar. Japanese Yen traders will then react to the direction of the dollar.

According to estimates, Core Durable Goods Orders are expected to come in at 0.4%, up from minus 0.5%. Durable Goods Orders are forecast to come in at minus 0.5%, slightly better than the previously reported minus 0.8%.

U.S. Treasury yields should respond positively to better-than-expected data. This should help boost the dollar against the Japanese Yen. The Forex pair could break hard if the numbers trounce the forecast.

Look for the USD/JPY to weaken if the data comes in lower-than-expected. Yields should fall on the news, making the U.S. Dollar a less-desirable investment while boosting the appeal in the Japanese Yen.